Q1 2024 Quarterly Commentary

In real estate, the saying is location, location, location. In global equity markets, the saying is earnings, earnings, earnings!

As of late March, 450 out of 500 companies on the S&P500 index have reported 2023 Q4 earnings and 76% beat market estimates by an average +7.57% The percentage of S&P 500 companies reporting positive earnings is above the 10-year average.

What does that mean? The 2023 Q4 earnings season has been solid. The best in the last decade. Over the long term, earnings are the strongest driver of share prices. Yet it often takes the global equity markets time to catch up to the good news, especially when markets are recovering from negative financial news. Global equity markets can front-run and act in advance of positive news and other times it is like trying drag a four-year-old to a dentist appointment. They will get there, its just takes more time and coaxing than planned.

You can list all the other factors for why global equities are doing well: Expectations for rate cuts, more distance from the pandemic, supply chain fixes, historically low corporate debt, you name it. Above all these factors are earnings strength. Said differently, profits are not only up, but an above average number of companies are reporting positive results. When given the option of two businesses to invest in, the standard metric is that the optimal option is the investment with the most revenue, least expenses and therefore the highest profit margins. Profitable companies attract investment. When equities are profitable, money flows to them. When companies are at 10-year peak profitability levels, even more money flows into global capital markets. The principal is simple, but the media would prefer you think it is more complex.

When looking in the rearview mirror we can tell that October of 2022 was an important month. It was the turnaround date from which equity markets crawled out of their slump relative to today. At the time October was a “nothing” month. Rates did not decrease; global conflicts did not slow down, and recession worries were at maximum levels. So, what happened? It was the first time since the rate hikes of early 2022 where large capitalization companies reported earnings greater than expected. It was also the first time since the initial rate hikes the US federal reserve and European central bank stated that they would not be increasing rates at the same rate. Rates did not drop, there were only whispers that rate increases would slow.

Morgan Stanley Capital Index (MSCI) Performance – 3 years annualized.

Yes, interest rates are high. No, the inflation conundrum has not solved. Global military conflicts are persisting and intensifying. However, every past stock market rebound has occurred while the news is still poor. If you need proof of this, compare your retirement portfolio to the current newspaper headlines. The economy and stock market are two vastly different animals.

If you would like to connect for a full review or a quick call to discuss your financial plans, you can reach Sum, Kayla, or myself anytime. You can also schedule a convenient time directly in our calendar using our online meeting scheduling tool.

Kind Regards,

Christian

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